Tips for Refinancing Your Auto Loan

For borrowers looking to lower the monthly payment or interest rate on their auto loan, refinancing is an option worth considering. Through auto loan refinancing, a car owner can pay off their existing loan and replace it with a new one, which they then pay off to the lender (either a new lender or, in some rare instances, the same one as the prior loan). 

While the benefits of refinancing are obvious — saving money in the short- or long-term — there is still a lot to consider about the process. Where you stand financially and the value of the car both factor into refinancing and whether or not it makes sense for your unique situation.

In light of everything that goes into refinancing, here are four tips to consider when exploring your options.

Check Your Credit Standing

As is with almost all loans, an applicant’s creditworthiness will come into heavy consideration during the approval process. Refinancing is no different, as the contents of a borrower’s credit report go a long way in determining not only if they are approved, but at what rate. As such, it’s important to check your credit score when refinancing to make sure you’re eligible for the best interest rate possible. Also, the more you’ve paid down other bills the better, as debt-to-income ratio is another big factor in the approval process.

Consider the Interest Rate Market

While there are a lot of individual actions a person can take to boost their creditworthiness and improve their chances for a lower interest rate, there are external factors also in play. The  interest rate environment is in pretty constant flux, based on the overall economy. It could be a downturn (like the 2020 recession) or even regulatory changes that cause interest rates to drop. The idea of “timing the market” to obtain the best refinancing may make sense, even if rates only drop by a percentage point or two. 

Assess Your Car’s Loan-to-Value Ratio

Just as (and even more) important than your debt-to-income ratio is your car’s loan-to-value (LTV) ratio. The formula for LTV is simple, as it weighs the amount you owe on your loan against the car’s current value. Ideally, when refinancing, you want your car’s value to be higher than the balance on the loan. In the instance when the amount owed is greater than the value, the loan is considered “underwater,” which makes it difficult to obtain a desirable interest rate when refinancing. For this reason, it’s typically advised to refinance sooner than later, as cars depreciate in value the minute they’re driven off the lot.

Weigh Costs and Fees

Say you are able to obtain a lower interest rate or simply reduce your monthly payment — it’s still important to consider all of the costs and fees involved in refinancing. For those who can’t lower their interest rate, stretching out the loan term will result in more interest paid over the remaining life of the loan. In addition, refinancing will typically involve other fees, which can or cannot include (depending on your state) re-registering your vehicle, title transfer, and upfront lender fees. As a result, it’s important to weigh these costs when refinancing to see if it makes sense financially. 

Bottom Line

When all is said and done, refinancing an auto loan can save borrowers a significant sum of money if they are able to obtain a lower interest rate. For those just looking to lower their monthly payment and free up some cash flow, doing so will result in greater interest overall in addition to new fees, so it’s important to consider all of these factors when it comes to refinancing. With Fiona, it’s easy for users to compare offers from top providers all in one place, to figure out which option makes the most sense.